Little Hope For Crude Oil Exports If Clinton Is Elected

I know some people cringe at the idea, but Hillary Clinton is the current favorite to win not only her party’s nomination, but the presidential election in 2016. An online Irish bookmaker lists Hillary at 11/8 odds to win the presidency, followed by Jeb Bush and Donald Trump at 9/2 odds, and then Bernie Sanders, Joe Biden, and Marco Rubio at 8/1 odds. (You can even bet on Kim Kardashian at 1,000 to 1 odds of winning the 2016 presidential election).

Some will argue that her unfavorable ratings are too high, but all of the leading candidates have significant negatives of one kind or another. I imagine that Hillary Clinton versus Donald Trump could result in the highest voter turnout in U.S. history — much of it from voters trying to keep the opposing candidate out of office. Others have argued that someone will rise up and knock Hillary out of the lead. That was my exactly feeling 8 years ago during the Democratic primaries when Hillary was in the lead — that Barack Obama would not only win the party’s nomination but would go on to win the presidency. I felt like he could beat McCain, but I didn’t think Hillary could have beaten McCain in 2008. But I don’t see a Barack Obama in the wings this time around. I think it’s Hillary’s election to lose, even though a large fraction of the population loathes her.

Hillary on Energy

Given the circumstances, let’s take a look at Hillary’s energy proposals. As I pointed out during the 2008 election campaign, her energy policy proposals have been rife with pandering and flip-flops. Of course, they all do it to some extent. John McCain wasn’t above a bit of both, flip-flopping on ethanol and pandering by proposing a cut in gasoline taxes leading up to the election.

A good example of Hillary’s pandering can be seen in her approach to TransCanada’s (NYSE: TRP, TSE: TRP) proposed Keystone XL pipeline expansion. Back in 2010, then Secretary of State Hillary Clinton was asked about the prospects for the project, which was under review at the State Department. Clinton responded: “We’ve not yet signed off on it, but we are inclined to do so and we are for several reasons.” Clinton got a lot of backlash from environmentalists for her stance, as they broadly opposed the project.

The State Department report ultimately concluded that the pipeline would be unlikely to significantly impact global carbon dioxide emissions. And up until recently, Clinton had never expressed any opposition to the project. Back in the summer she dodged a question from a New Hampshire voter who asked “As president, would you sign a bill, yes or no please, in favor of allowing the Keystone XL pipeline?” Clinton’s response was more politically calculating than her 2010 response: “I am not going to second guess President Obama because I was in a position to set this in motion. I want to wait and see what he and Secretary Kerry decide. If it is undecided when I become president, I will answer your question.”

Her position on the issue shifted a full 180 degrees recently in Iowa when she matter-of-factly announced her opposition as if there had never been any question: “I think it is imperative that we look at the Keystone pipeline as what I believe it is — a distraction from important work we have to do on climate change. And unfortunately from my perspective, one that interferes with our ability to move forward with all the other issues. Therefore I oppose it.”

What is behind her flip-flop on this issue? I think the reason is purely political. Senator Bernie Sanders is her closest rival for the Democratic Party’s nomination for the presidency, and he has been adamantly opposed to the pipeline. Likewise, Vice President Joe Biden — who hasn’t declared but who has many supporters hoping that he does — has steadfastly stated his opposition to the pipeline. Thus, in order to keep Sanders, and potentially Biden, from peeling away support from environmentalists, she made the political calculation to rotate to the left on this issue.

Implications of a Flip-Flop

What does this mean? I think it has two implications. First, because no major Democratic candidate favors the pipeline, and because the Democrats are favored to win the presidency, unless the Republicans buck the odds, then the Keystone XL pipeline project is probably dead.

But there is another implication, in my opinion. Opponents have cited various objections to the Keystone XL pipeline, but the truth is that the pipeline is really all about climate change. Environmentalists believe the pipeline would be furthering a fossil-fuel dependent global economy that is leading to a climate catastrophe. And it turns out there is one more energy issue with similar characteristics working its way through Capitol Hill.

The U.S. has a crude oil export ban in place that dates to The Energy Policy and Conservation Act (EPCA) of 1975. This energy bill was a response to the 1973 OPEC oil embargo, and contained measures designed to enhance U.S. energy security. One of the measures of the bill effectively bans crude oil exports to all countries besides Canada.

Thirty years later, as domestic oil production surged as a result of the shale oil boom, the export ban began to limit the markets for domestic producers. While the U.S. is still a large net importer of crude oil, U.S. refiners spent billions of dollars over the past 2 decades to install equipment to process heavy sour crudes. The crudes that have come online in the shale fields of the Bakken and Eagle Ford are relatively light. Thus, U.S. refineries are limited in the volumes of this crude they can process.

As a result, the benchmark for U.S. crude oil — West Texas Intermediate (WTI) — which historically traded at a premium to internationally-traded Brent crude, began trading at a discount. To rectify this, oil producers and politicians in major oil-producing states began lobbying for an end to the crude oil export ban so some of this light oil could be exported — which would improve market conditions for domestic oil producers.

Beneficiaries of the Crude Export Ban

Not everyone in the oil industry favors ending the ban. Refiners, in particular, have benefited from the ban. Because there is no ban on the export of finished products (e.g., diesel, gasoline, etc.), U.S. refiners can buy discounted domestic crude oil and then export the finished products at very healthy margins. Thus, major refiners like Valero have come out strongly against ending the ban.

Some believe that the President’s opposition to the repeal is also a nod to the U.S. Steelworkers union, which opposes ending the ban because of the potential loss of refinery jobs. Ending the ban would, in fact, likely decrease the margins for refiners, while boosting the profits of the domestic oil producers that supply them.

Nevertheless, there is significant support for ending the ban. Energy Secretary Ernest Moniz has said that the ban should be revisited. Senate and House bills have been introduced to end the ban, and the House Energy and Commerce Committee recently voted 31-19 in favor of ending it. But following the vote, the Obama Administration came out against ending the ban, citing the potential for higher U.S. gasoline prices.

As with the Keystone XL pipeline, the president’s opposition is really about climate change and the continuation of a fossil-fuel based society. A number of studies — including one done by the Energy Information Administration — have concluded that ending the ban wouldn’t increase gasoline prices.

The EIA reported: “Petroleum product prices in the United States, including gasoline prices, would be either unchanged or slightly reduced by the removal of current restrictions on crude oil exports. As shown in a previous EIA report petroleum product prices throughout the United States have a much stronger relationship to Brent prices than to WTI prices.”

What is likely is that some places (like the Midwest) would see higher gasoline prices, other areas (perhaps coastal markets) would see lower prices, and the net effect would be neutral to slightly lower prices. But when you understand that the real basis of the opposition to ending the ban is the same as the basis of the opposition to the Keystone XL pipeline, then you understand that the gasoline price argument is simply a politically convenient cover.

Conclusion: No Repeal of the Crude Export Ban

What does this have to do with Hillary Clinton? One of my 2014 predictions was that the crude oil export ban would not be overturned by President Obama, on the basis of the same stiff opposition from environmentalists that paralyzed him on the Keystone XL pipeline issue. Thus, since Hillary is the odds-on favorite to win the presidency and given her new-found opposition to the Keystone XL pipeline, President Hillary Clinton would likely follow the same path on the export ban in order to appease environmentalists in the Democratic party. Refiners will be very happy, while domestic crude oil producer will continue to have their markets restricted.